Inventory Management 101

Did you know that from 2016-2017, retailers using technology to manage their inventory increased by only 2%? According to WaspBarcode’s research, 14% of all surveyed retailers still use pen and paper to record their inventory while 21% use spreadsheets. Read on for all you need to know to manage your inventory better and prevent losses.

A few years ago, any method to track inventory would have been considered sophisticated compared to not tracking it at all. In order to significantly grow their business, retailers today must leverage the number of sales channels available to them. This requirement soundly increases the need for better inventory management and automation.

Before we even begin to discuss the need (or lack thereof) for an inventory management system, it helps to understand the basics. What is inventory, and what is dead stock? How can you track my inventory levels over time and use this information to benefit you? What are lead times and reorder levels and how are they calculated? Most importantly, why should it matter?

In this article, we address many of these questions so as to give you a lowdown on better inventory management.

The Rationale For Inventory Management

Poor inventory management results in low visibility of how your business performs. If you don’t know just how much stock you have, you may end up ordering more, or less, than you need in order to sell consistently.

Also, keep in mind the fact that sales for the same product tend to fluctuate over time, sometimes even within a span of a few weeks. To leverage the sales spikes and buffer against slumps, you need to know the exact status of your stock.

The Bottom Line

Your inventory takes up physical space that you pay for, apart from the amount you invest in the goods themselves. Being diligent about moving your stock out and making a sale ensures that you take up less warehouse space, sell at every opportunity and spend as little as possible on your inventory.

inventory

 

Gather Your Data

If you are just starting out with managing your inventory, or even if you have lost track and want to get back now, the first step is to conduct a stock audit.

 

  • NOTE: Make a note of all the products you sell across channels, including attributes such as their SKU and the exact location of the product in your warehouse.

  • LABEL: If you are just starting out, the best thing to do is count and label all incoming stock from your vendors. As a best practice, this is also a time to check every product for damages.

  • SYSTEMIZE: In your warehouse, label each shelf and every counter. On your product label as well as in your inventory management system of choice, make a note of the shelf number on which the product exists.

  • ADJUST: During a stock audit, it is likely that you may find lost and damaged goods. If you do, write them off in your books of accounting appropriately. Remember to adjust your stock levels to reflect the actual stock in hand.

  • DOUBLE CHECK: If you have products that are currently in transit to your warehouse, make a note to check and add them to your inventory when they arrive.

 

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(Stock audits change depending on the size of your warehouse and your scale of operations. Use this guide for reference.)

The Cost Of Holding (And Not Holding) Inventory

Stocking up too much inventory will cost you, literally. The ordering cost of your inventory is the price you pay your vendors for the products, as well as shipping and handling charges. In other words, ordering cost is the fee involved in buying a product and bringing it to your warehouse.

From the time a product arrives at your warehouse, it occupies space that you pay for. Carrying cost is the fee you pay to store your inventory, as well as additional fees such as insurance, or losses due to damage and theft.

Strange as it may seem, having too little stock can also cost you. Indeed, this cost is much harder to measure but may be much heavier than the other costs you’ve thus far incurred. For example, losing a customer due to out-of-stocks could mean they never come back to you.  Furthermore, they may recommend that people not buy from you, resulting in damage to your brand’s reputation. The end result is a lost opportunity to build loyalty.

Even worse, if you accept the order, only to realize that the product is out of stock later, the consumer may perceive it as a breach of trust, especially if they have already paid for it.

Inventory Terms And Calculation

Now that you see why managing inventory well is so important, we’ll dive deeper into the ‘how’. Inventory management a lot of specific terms. We’ll do our best to explain them simply.

As mentioned above, too much stock is a very real concern. But how much is too much? Below is how we accurately calculate this upper limit.

Maximum stock level = Reorder Level + Reorder Quantity – (Minimum consumption x minimum reorder period)

Before you get all worked up, all you need to understand from the formula is this: the maximum stock level depends on how much you reorder every time from your vendor, as well as the least amount of goods you sell in any given time. This makes sense because the most you should stock is always dependent on the least that you can sell.

Likewise, the minimum you should stock depends on the most sales you have made in a given time period, plus the longest amount of time your vendor has taken to deliver your stock.

Lead Time

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What is lead time? Lead time is the amount of time your vendor takes to deliver products to your warehouse. In the maximum stock level calculation, we take the minimum lead time into account while calculating the reorder level. Likewise, in the minimum stock level calculation, we use the maximum lead time.

Reorder Level

Let’s talk about reorder level. Simply put, the reorder level for any product is the number of units you have in stock when you decide to order more from your vendor. This is calculated as follows:

 

Reorder level = Daily sales x Lead Time

 

For example, if you sell an average of 10 units of product every day and your vendor takes 7 days to deliver new stock, your reorder level is 70 units. When your stock levels for product A approach 70, you need to raise a new purchase order with your vendor.

For now, these calculations are enough to get you started. However, keep a few things in mind:

  • You will need to calculate all of these factors separately for every single one of your products. (Note: if you have apparel in different sizes, you need to calculate each of these parameters separately for each size.)

  • Retailers often hold ‘safety stock.’ This stock helps tide through sales spikes as well as times when vendors take too long to restock. If you wish to learn more about inventory calculations, take a look here.

One Last Bit Of Advice

If you’ve been putting off inventory handling and management because of its sheer proportion, know that doing it now rather than later can save you a world of pain (and money!). While at first it might seem complicated, start off simply by tracking the products you sell most often. As you begin seeing results, you can expand the process to the rest of your inventory.

Did I mentioned it’s a good time to conduct a stock audit even if you’ve never done one before? A stock audit should always be the starting point for good inventory management. All your calculations from above depend heavily on what you actually have right now.

In order to calculate reorder levels over time, you need your sales data. If you haven’t been tracking it, start right now! Consolidate your sales data for at least the past six months, anything less cannot help you see trends and patterns in sales.

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If you sell more than five to ten products, (or through more than one sales channel), we highly recommend the use of a good inventory management system. Set it up, and back it with a sound stock audit, and never worry about running out of stock again.